Broad support for budget balance, then what?

OTTAWA - Jim Flaherty has been signalling for months that fiscal Valhalla is just over the horizon.

Today, the only finance minister Stephen Harper has ever employed will deliver a federal spending blueprint that will forecast a balanced budget next year, in 2015.

In one respect it should mark a return to the salad days of the Conservatives' first two years in office, when Canada was nearing the end of a decade of surplus budgets that were the envy of governments across the developed world.

But the sound of champagne corks popping will be muted by the reality of the long, sputtering recovery that's come in the wake of the 2009 global recession, and the back-to-back-to-back austerity budgets that followed the federal stimulus spending splurge.

"We know we expect to get to balance in 2015," Tyler Meredith of Montreal's Institute for Research on Public Policy said in an interview.

"The question is, what's the size of the surplus and the trajectory of the surplus after 2015? We're certainly in an environment of much lower growth potential, simply because of an aging population, than we were 10 years ago."

That's one note of caution.

Another is a government decision to squeeze some revenue streams, said Andrew Sharpe, executive director of the Ottawa-based Centre for the Study of Living Standards.

"The biggest shock for the whole fiscal system was when they cut two percentage points off the GST a few years ago," said Sharpe.

"That really reduced the revenues that would be flowing to the government in a robust economy."

Consider that when the Conservatives came to power at the tail end of the 2005-06 fiscal year, the goods and services tax brought in $33 billion. Nine years, two tax cuts and a recession later, the GST is projected to bring in $31.7 billion in 2014-15.

Corporate taxes, also cut, will climb from $31.7 billion in 2005 to $37.3 billion this year, according to government estimates — a 17.6-per-cent increase that looks pretty good until you realize it doesn't account for inflation.

Personal income taxes, by contrast, provided Ottawa $103 billion in 2005 and will total about $140 billion this year, a non-inflation adjusted rise of 36 per cent, while employment insurance premiums that garnered $16.5 billion then will total $23.8 billion this year, a 44 per cent rise.

Total government revenues were 16.2 per cent of the country's gross domestic product in 2005. They're projected to be down to 14.4 per cent this year.

And so it was that in the fall of 2005, the Liberal economic update was able to promise $100 million over five years to expand rural broadband, and $590 million over five years to support transportation infrastructure to enhance "Canada's Pacific Gateway," among other goodies.

Today, the combination of tax cuts and a determined drive to balance the books is putting a tremendous squeeze on everything from government procurement to services. Rural broadband and a Pacific gateway are on the Conservative agenda, but dollars are tight.

The parliamentary budget officer has been in a protracted fight since Flaherty delivered his 2012 budget to get the government to explain exactly where all the cuts are being made, to no avail. But the much-publicized closing of Veterans Affairs offices, Coast Guard stations and scientific libraries across the country begins to hint at the real cost of returning to surplus.

While most economists say next year's electorally driven balanced budget target is not based on any fiscal imperative, the public appears to be largely onside.

A new Harris-Decima poll finds a remarkable consensus about deficit reduction that crosses regional and party lines.

The telephone survey of 1,008 respondents found that 60 per cent believe the government is doing at least a fair job (39 per cent) or better in managing the country's finances.

And a clear majority, 57 per cent, believe the deficit should be eliminated before any increased spending occurs, compared to 34 per cent who said it is OK to increase spending even though there's still red ink.

The Harris-Decima poll found that even among self-identified New Democrats, the split was 48-44 in favour of retiring any deficit before increasing spending.

Self-identified Green party and Bloc Quebecois supporters were almost identically fiscally hawkish to Conservatives, who favoured deficit reduction 69-25, with Liberal supporters falling between the Tories and NDP.

The poll is considered accurate within 3.1 percentage points, 19 times in 20.

"There's a pragmatism that Canadians seem to share," said pollster Doug Anderson of Harris-Decima. "It just seems there's a lot more commonality across partisan stripes than you might expect, given rhetoric or traditional stereotyping."

Sharpe, of the Centre for the Study of Living Standards, calls it an "all-encompassing ideology that we've all accepted for many years — which is unfortunate, because deficits are extremely useful in times of weak economic activity."

The government's drive to balance the books is actually putting a drag on the economy, according to many economists.

At the height of the stimulus spending in 2010, Canada's GDP grew 3.2 per cent — of which about 1.1 per cent was attributed to government spending.

As stimulus spending was withdrawn, economic growth fell to 2.6 per cent in 2011 and was down to 1.8 per cent in 2012.

As Sharpe puts it, "You can have a significant deficit and still have a falling debt-to-GDP ratio. No one makes that point."

For now, the consensus in the government and among the public appears to be hunker down and grind it out. The policy debate may renew only after the deficit is vanquished.